Forensics and the art of triangulation


(Krishnaraj) #62

Finally EOW registers a case against the Directors of Geodesic for diversion of funds and arrests them. I also wish the auditor were also under scrutiny.

Here is the link - Geodesic Directors arrested


(Varadharajan Ragunathan) #63

Thanks - quite ironic. in such stuff, one must remember that it takes years for law and enforcement agencies to catch up and show action and the stock price can go beserk in the meanwhile.

Geodesic was touted once as a non linear biz from india and they claimed higher revenues than what yahoo claimed from YM at their peak.


#64

@varadharajanr , Geodesic was always a shady company. But people tend to ignore the fact as long as prices keeps going up. I see similar companies hitting upper circuit since last year in name of cloud, IoT etc.


(Krishnaraj) #65

Imagine I offered you a stock slice of a company started by a hard working, experienced and aggressive entrepreneur that was:

  1. In a high growth sector of the economy
  2. Asset lite
  3. High margin
  4. Grew revenues and operating profit 3X at Rs 300 crores and Rs 96 crores across 2 years.

You would mostly consider it favorably and some may be tempted to assign, with the benefit of an impressive track record, a very high multiple.

So you make an imaginary purchase and pay up for growth; after all there are much smarter investors in there.

Now, let’s fast forward after your investment and here’s what happened - Growth, growth and growth

Interesting, isn’t it?

Warm regards,


(richdreamz) #66

I know people have been gung ho about “Cambridge Technology Enterprises” due to the hotness of the sector. So, I have been doing quite a lot of reading about this company given that the Chairman comes across as a highly innovative person and quite vocal about his future plans.

I’m simply presenting below the publicly available information obtained from “google search” and I’m not siding with either of the parties involved in the below court cases in USA/India etc and I will leave it to reader’s judgement.

  1. It is quite interesting to note that CTE chairman was into ‘real estate’ by co-founding Trikona during the days when real estate was the hottest sector and is perceived as easy sector to attract foreign funds. It is evident that from the 2008 financial crisis the firm did badly but the firm was able to attract lot of funds (from Lehman brothers etc.) as it was investing in a hot sector in a fast emerging country, i.e., India.

  2. Now, when Trikona ruffled in bad weather and closed as per court orders (below links), he is now focussing on cloud and big data (the next hot sector) by acquiring a major stake in CTE which was already involved in some SEBI cases for stock manipulation. Is there a trend here in his activities - be a part of hot sector, attract funds?

  3. I have read through all the below links and not being a professional lawyer, I could not understand fully, but can make out that each of the co-founders had put cases against each other for misappropriation of funds etc. and acting against the interests of the firm they indeed incorporated as LLC.

  4. The eventual closing down of Trikona and each parting ways to incorporate separate companies and the judges not finding ‘innocence’ in either of the 2 founders is a red flag, I believe. Any law expert in the forum can throw more color on the below links.

  5. Given this background, I’m a bit skeptical in investing as of now and I’m not an investor in CTE. I know people mend ways but I would need further confirmation of that to put my money in the company yet.

  6. If this post is in violation of any forum rules, the moderators are free to take appropriate decision. I have put the post in this thread as this looked like the best fit as there is no dedicated thread on CTE and I’m not sure if my post warrants a dedicated thread yet.

http://pdfserver.amlaw.com/cli/summons/oca_summons_652931_2012_1.pdf

http://www.mydigitalfc.com/hedge-fund/hedge-fund-wants-wind-trikona-trinity

https://ecf.ctd.uscourts.gov/cgi-bin/show_public_doc?2011cv2015-378

So, the investors should be very cautious before making any investments without thorough research and also judge if the company has enough long term impeccable history.

I’m open to contrary views as appropriate.


(Krishnaraj) #67

@richdreamz thank you for bringing this to light.

As per my experience and observations, a white collared crook remains one even when caught. Not only because of habits but also because past obligations always come home to roost. Favors or debt sought in the past would need to be returned and cannot often be done in a clean manner.


(Krishnaraj) #68

Another instructive case of fraud order by SEBI on Valecha Engg and related entities.

This can be found here SEBI order on VEL and related parties

VEL took out money from its coffers and funded preferential allotment of promoter and related entities. As a result these entities got additional shares but did not pay for it. The company, and hence the minority shareholders, paid for the promoters’s share purchases! Further the company transferred funds to such entities to put a lot of trades on the company’s shares.

It had a sub-broker as an employee and an Independent Director dealing with a promoter related entity.

Further when SEBI issued notices, the company claimed innocence by saying that the transactions were genuine as it owed money to the promoter entity. Subsequent investigations showed that the promoter entity showed inflated demands on the company not borne out by bank statements but made such in its books!

A few years later the promoter of the company was at Davos talking about how Indian CEOs are different, consider all stakeholders in mind and have far more social values than other CEOs - At Davos.

Ironic. And kudos to SEBI.


(Varadharajan Ragunathan) #69

As an aside, one of the most common bugbears in indian markets are companies that have real businesses that are used for money laundering - typically a few industries are conducive for converting black money into white

  • high capex upfront and/or payments in cash (eg., airlines - where money is routed through tax havens for purchases, agri inputs - which are tax free, infra companies/real estate companies - where land purchases are done in cash, healthcare in b2c ). This is because everyone wants to minimize friction costs - viz., indirect taxes and hence want to use industries which have no indirect/direct taxes (agri inputs, b2c healthcare)

  • companies with huge tax exemptions - a few years back, STPI tax exemption was a craze and several such companies were used for bringing in laundered money from abroad. similarly, companies in SEZs especially in industries like gems/jewellery (where intrinsic value is difficult to assess) use over invoicing to bring in cash or under invoicing to export out cash as there are no other sales/service taxes.

  • yet another trick that was used in the early 2000s were FCCB’s - several small companies brought in FCCB’s and defaulted on them. Since the strike price was chosen “smartly” enough never to let dilution happen, most of them just get in the money into India. Most of the overseas bond holders were “friendly” guys who chose not to act post default.

I would try and dig deeper into companies in industries which have low direct/indirect taxes and have a bloated balance sheet and/or have abnormally low or high profit margins when compared to competitors.


(Varadharajan Ragunathan) #70

good reading - interesting questions remain un answered

  1. if 2014 financials had not been filed until october 2015 (when this story appeared), what were th board of directors doing at board meetings ? they had reputed names from sequoia, murugappa group and GIC. So, what went on the at least 5 board meetings that should have happened post march 2014. were they minuted ? if they had objections to the governance, where were they raised and why did’nt they publicly acknowledge it or resign before ? perhaps a case of abilene’s paradox at work here - no one wants to be the first one to bell the cat and everyone thinks this can go on until my time is over and someone else picks up the pieces.

(Krishnaraj) #71

@varadharajanr We do not know the minutes of the Board Meetings and based on what Mr Alagappan says, it is likely there may have been some notes of dissent in the minutes. That would not be privy to the public.

Cooperation with the Mint article is an indirect way of taking a grievance public. And note that the Directors say they were not told of the IT Notice. The notice would have come to the registered address, addressed to the BoD but then who opened it is not known and it is highly likely Arun may have held this back from BoD.

Nevertheless the pecuniary relationship with the politicians that is a prima facie violation of is law is not at all established in the article. But I do think without political patronage Vasan may not have gotten such high working capital from Corporation Bank.


(Krishnaraj) #72

In connection with an excellent report in Mint on rise in forensic audit, [Rise in forensic audit - Mint] (http://www.livemint.com/Industry/ectQa2vHqV5ZXBavNXjxlN/Banks-step-up-forensic-audit-of-borrowers.html) I looked up the RBI circular referred in the article. Listed on the last page are 45 signals of fraud. I found it very instructive though sadly many will escape getting caught in the annual report. The RBI circular is attached here (RBI framework for dealing with frauds), refer the end for the list of 45

Hope this is useful.


(Srinivasan Sundaram) #73

Fathers of Forensic Auditing

Link from simple tax india


(Krishnaraj) #74

In a first, SEBI passed an order on an auditor last week.

This is a great development for minority investors. It is quite common knowledge that many auditors do not uphold the ethics of their all important profession. They wilfully sign statements that mislead the fair affairs of the company leading you and me to believe that the company is in a far better state than it actually is.

I think such activity is a criminal breach of trust. However ICAI does very little about it, and Charlie Munger says in his talk on ‘Psychology of Human Mis-judgment’ that tolerating bad behaviour can degrade civilization. Even petty crimes needs to be dealt with. Tolerating small mis-demeanour once encourages some more and over time the place de-grades.

SEBI found that the auditor signed on financial statements that did not report many transactions, falsely reported transactions, claimed to say internal audit was OK, when there was no internal audit in the firm.

Share prices zoomed and collapsed later causing many to lose money.

The name of the firm was Ritesh Properties and Industies Limited and the order can be found here - SEBI order on the auditor


(Krishnaraj) #75

The Sharepro Services fraud is all over the papers so many may be aware of it. Some members may be aware of the duplicate share fraud in the RIL stock decades back. The Registrar and Transfer Agent (Sharepro here) keeps records of shareholders, effects transfers and is responsible among other things to pay dividends as per the instructions of the company. That has proven to be a ground for fraud. That’s because many shareholders have too small amount as dividend, some are unclaimed etc.

SEBI has provided a detailed order on the manner in which it was carried out. The alleged culprit used proxies like her driver to siphon off money.

Makes interesting and instructive reading. Like issue dividend DD to a passive shareholder and then cancel and reissue it to proxies. Also makes it worrying that if the RTAs are left loose they will run havoc.

Sharepro Services fraud


(NNaik) #76

A good case study to learn about uncovering dubiousness

Yesterday I came across Arrow coated products while running a stock screen looking for companies with high ROCE, High Margins and high growth. this company really stands out on all basic parameters and if you give a cursory glance at the business it is in everything sounds great - great space to be in with good future runway for growth.

Moment you start digging in you start getting questions. Even before I got into the AR i went to the VP thread on this (Arrow Greentech (Old name: Arrow Coated Products) - Anybody tracking) and our resident sherlock @varadharajanr had already picked up quite a few hole sin the story. Many others had raised similar doubts after their interaction (or lack of) with the management.

This was enough to raise reasonable doubts for me to stay away from this. It may turn out to be a great business and a multibagger for others but it is not for me. I would never rue others making money from this - I don’t need too many ideas to invest in anyway - looking at smaller cos better to miss the bus than lose money. Reminded me of some of the ideas from Prof. Bakshi’s great post on Risk (https://fundooprofessor.wordpress.com/2016/02/24/risk-seeking/) . As Munger says if I know where I am going to die I will not go there. Surely we do not know where we will die but we know where there are higher probability of dying.
following excerpt from the post is useful.

psychologically astute people like Buffett and Munger have a no-fault rule when they get invited to auction situations.

The rule is: Don’t Go.

Now let me tell you something about no-fault rules. The idea behind having a no-fault rule to prevent horrendous losses from risk-seeking behavior like the one described above, even though following such a rule may result in a few lost opportunities. The cost of missing those opportunities is reckoned to be minuscule as compared to likely losses from indulging in risk-seeking behavior. This is an important philosophical point to keep in mind

Coming back to Arrow Coated I went ahead and read the AR as an exercise in forensics and to figure out if there are red flags a starting investor can pick without the expert advice of people here. Few things that stood out

  1. No dividend has been declared and all profits are retained. Many good cos do (it may be good capital allocation for some cos in excellent businesses) this but in small cos a consistent dividend payout can give some indication you that real money is being made. Pair this with the management salary, which seems low, and you wonder where the promoters are making their money.

  2. coming to P&L and Other expense is the biggest cost item - material cost is only 18%, employee cost 11%, man exp .only 7%. the other expense also varies wildly - down from 7.7 crores to 3.6 crores while the revenue has gone up. This fall is due to 3 cr. of Product research expense which is 0 in 2015!!! totally mindboggling for a supposedly IP led company. Maybe there are some accounting policies changing that causes this and I have not yet read about it but there are enough alarm bells ringings to wake up Kumbhakarna

  3. Inventory is down from 3Crores to 0.7 Crores!!

  4. Come to revenue and you have real kicker. Revenue from Sale of products is only 25% and rest is some Royalty income --> this would be first question that you would need to resolve if you are interested in this company. also 2/3 of this Royalty was classified as some consultancy fees in 2014 which is 0 now!

This was definitely a good exercise and the learning is that while looking at undiscovered stocks or ideas probability of permanent loss is very high. I would personally stay away from such situations. Others can draw their own conclusions but be aware of the risks associated with such an investments

Disc: not invested :slight_smile:


(Krishnaraj) #77

The Ricoh fraud. Here are the documents:

  1. Quarterly results at Sept 30, 2015

  2. FY 2015 Ricoh Annual report

Today after much hullabaloo September 2015 results were released. It is simply damning. The whole net worth has been wiped out. Auditors say do not rely on these figure because we ourselves are not sure. They have noticed substantial irregularities including fraud. The CEO (who promised 50% CAGR in a TV interview - Interview with ET Now) and CFO have been placed on leave till investigations are complete.

The size of irregularities and possibly the length it went unnoticed shocks the mind. The older auditors Sahni and Natarajan seem to have not done their job. Audit committee ordered a forensic review by PwC and later BSR and Co (ala KPMG) did the audit.

I was wondering how one may have caught this early on from the financial statements. The FY 15 Annual Reports show borrowings to have increased substantially (and from related parties); from Rs 357 crores in March '14 to Rs 700 crores in March '15. There was a corresponding rise in Trade Receivables and ‘Subsidy and Warranty receivable’. It seems that borrowings were essentially used to show Income. BSR says that invoices were raised without dispatch of goods :slight_smile: …in a business where margins are small, I can borrow some money raise a lot of bogus invoices and bogus vendor purchases, and show the borrowed money as the net difference, i.e. profits. The way to possibly triangulate is through cash flow from operations. It was worsening from Ricoh from a negative Rs 59 crore in FY 14 to negative Rs 222 crores in FY 15.

Certainly fascinating!


(Niraj Kumar) #78

Ricoh india fraud appears to be unique category from other owner/promoters led frauds. Japanese promoters hold more than 73% in the company and interested to delist the company so promoters dont have any motivation to increase the profit or sales of the company and inflate the share price because less share price is much better to buyout minority shareholders and delisting easily. It appears that some top level indian management team is involved in fraud (they are just salaried employee and dont have any direct shareholding /stake in the company neither any ESOP etc incentives) and doing some false billing etc to get money/commission through vendors etc. I guess many indian MNC top management do get indirect benefits for choosing a favored vendors/customers as foreign promoters are not well versed in indian local business practices and languages. This fraud appear more of a compliance issue and generating invoicing bypassing proper legal channel (similar scenarios happen few years back in onmobile global by founder of the company which now back on track) and supplying company hardware to below market rates to relatives of top management etc as promoters lack motivation to encourage this kind of fraud (actually ricoh japan has already validated good outlook for company business in coming years) Ricoh japan press release on ricoh india situation. Strong top line growth of the business underlines strong demand for their product and services in indian market.


(Raj Panda) #79

Ricoh had -ve CFO for each of last 5 yrs, cumulative -450 cr. compared to it’s PAT of about ~65 cr. in last 5 years. That was not understandable to me, so gave it a pass and got lucky to escape the punishment. But somehow none of the people positive about Ricoh considered that as a negative !!


(Krishnaraj) #80

Thanks Raj that was very useful to know.


(Niraj Kumar) #81

Raj i guess market is well aware about this thats why till 2 years back this share was priced so low. Till that point they are more like a trader of Japanese parent hardware (which is a very low margin business and carry risk of currency fluctuation etc) and indian company lacks power to dictate terms with powerful parent foreign entity. However hype around digital india and increasing proportion of IT service business (which is high margin) in overall revenue mix and expected high growth rate in near terms has caused stock price to rise so high in short time.